Cyprus: Things Fall Apart

If you’re interested in going deep on Cyprus, I’d recommend playing around with Daniel Davies’ banking crisis choose-your-own-adventure game, but the point boils down to a pretty simple one: Cyrpus needs about 17 billion euros, and the European Union is willing to give it about 10 billion euros. The latest plan from Cyprus is to avoid any taxation of deposits worth less than 20,000 euros, which is a big improvement on their initial plan. Unfortunately, instead of making up the lost revenue with a higher haircut on big deposits, the bill would just not make up the lost money, perhaps under the assumption that presented with a fait accompli, the EU will just hand over the extra 300 million euros.

A further wrinkle here is that the Russian government is now throwing a fit over the imposition of a 9.9 percent tax on deposits over 100,000 euros (many of which are held by Russians), even as most respectable opinion holds that the deal should be modified by making that tax larger in order to spare small depositors. Russia has various kinds of influence in Cypriot politics, and between Moscow’s entreaties to block a plan that screws rich Russians and popular pressure to block a plan that screws middle-class Cypriots, the legislative math of getting a majority in parliament for a deal is looking very tough.

At this point we’re back to the “eurozone lacks a workable decision-making mechanism” phase of the Institutional Problems With the Eurozone game. Lots of people all the world over would sleep better if any kind of deal within the range of reasonable possibilities was worked out. But the specific agents involved have strong incentives to engage in various kinds of stalling and brinkmanship tactics. Whether Cyprus gets 10.3 billion euros or 10 billion euros and whether Russian tax dodges pay 11.9 percent or 9.9 percent is of no great consequence to the wide world but of enormous importance to Cypriots and German politicians and Russian oligarchs, and the rest of us are all along for the ride as they try to work it out.